6:00 AM EDT, Friday, August 3, 2018
In its weekly Natural Gas Storage Report for July 21-27, the EIA announced Thursday afternoon that natural gas inventories rose by +35 BCF. This was 8 BCF bullish versus the 5-year average and a substantial 10 BCF smaller than my +45 BCF projected build. The bullish injection was driven by -7 BCF and -12 BCF storage draws in the Pacific and South Central regions, respectively. It was the second straight bullish build and the third consecutive much smaller-than-expected injection, during a summer in which most bearish investors (including yours truly, at one point) had expected a string of bearish and consistently larger-than-expected injections. With the injection, natural gas inventories rose to 2308 BCF while the storage deficit versus the 5-year average rose to another high of -565 BCF or -20%. Year-over-year, inventories are -688 BCF lower versus 2017.

In the afternoon, the EIA also released its weekly supply/demand data. For the July 21-27 period, production averaged 81.0 BCF before rising slightly to 81.1 BCF through Wednesday, August 2, up 7.7 BCF/day year-over-year. Notably, natural gas exports to Mexico rose to 4.7 BCF/day through August 2, which is a new all-time high. Other components of demand were also strong--likely supported by reasonably favorable temperatures--with powerburn averaging 35.4 BCF/day (year-ago: 34.4 BCF/day) and residential/commercial demand averaging 8.2 BCF/day (year-ago: 5.9 BCF/day). Adjusted for temperature, I estimate that natural gas supply/demand balance was 2.3 BCF/day loose through August 2 versus the 5-year average, which is on the low-end of the summer range of 2-4 BCF/day loose. As shown in the Figure to the right, temperature-adjusted natural gas supply/demand balance versus the 5-year average rapidly loosened earlier this summer as expected once the last vestiges of heating demand faded. However, this imbalance has since contracted--even after eliminating temperature as a variable--suggesting that fuel-switching driven by discounted prices boosted powerburn more than expected or perhaps, similar to the oil sector, production has been overstated.

Click HERE for more on current natural gas inventories or HERE for more on supply/demand balance.

Unsurprisingly, natural gas prices rallied following the report. The commodity finished the day up 6 cents or 2.1% to settle at $2.82/MMBTU. It was the highest close for the front month contract since July 27. Even with the rally, natural gas remains grossly undervalued based on current and projected inventories, even after accounting for the aforementioned looseness in the market. Based on projected Realtime natural gas inventories and an implied storage deficit near -562 BCF this morning, the commodity is undervalued versus its Fair Price of $4.21/MMBTU by 33%. By the end of the storage injection season when this deficit is projected to dip only to near -498 BCF, a discount of 28% versus a Fair Price of $4.08/MMBTU. Click HERE for more on natural gas Fair Prices. Overall, this week's storage report was unquestionably bullish with a smaller-than-expected and bullish build, tightening supply/demand balance and large undervaluation versus its Fair Price. While I am not expecting prices to approach their Fair Prices anytime soon, I do feel that the commodity trades above $3.00/MMBTU before the end of the injection season. WTI crude oil, meanwhile, recovered from early-session losses and finished the day up $1.30 or 1.9% and settle at $68.96/barrel, recovering much of Wednesday's losses. The rally was driven by optimism of a resolution in the ongoing US-China trade war rhetoric as well as fear over Iranian military drills in the Persian Gulf. However, barring a major geopolitical event, it is difficult to see WTI trading consistently above $70/barrel near-term after yesterday's disappointing EIA Petroleum Status Report. While I am bullish long-term, I would be reluctant to buy at these levels in this environment. My Oil & Natural Gas Portfolio rallied Thursday, rising +0.7% on the day to push 2018 gains back to +18.6%, or +31.7% annualized. The portfolio is within 0.5% of all-time highs. As a reminder, subscribers gain access to my realtime portfolio holdings, recent trades and twice-weekly investing commentaries detailing my market outlook and near-term trading strategy on my password-protected Portfolio Page. To learn more about subscribing and helping to support the site, please click HERE.

Natural gas demand will rise slightly today as temperatures begin a warming trend across the Heartland. However, readings will remain well below-average once again across the Southeast and Mid-Atlantic as a tropical plume of moisture keeps the region wet, cloudy, and cool. Highs will generally be in the low 80s from Atlanta northeast through Richmond, Va, 8F-10F cooler than normal. On the otherhand, after a windy, cool week across much of the Plains and western Great Lakes, a warming trend will begin today that will only build into next week. Omaha, Ne and Bismarck, Nd could both reach the mid-90s today, 10F hotter than normal, while even Minneapolis will climb back to seasonal temperatures for this time of year with highs reaching the low 80s. Overall, the forecast mean population-weighted nationwide temperature today will rise 0.3F from Thursday to 78.1F today, 0.6F warmer-than-normal. Forecast Total Degree Days today will rise to 13.5 TDDs, near average and the 19th greatest TDDs for August 3 in the past 38 years. Click HERE for more on today's temperature and degree day data. Based on this forecast and early-cycle pipeline data, I am projecting a +7 BCF/day daily natural gas storage injection, around 0.5 BCF/day bullish versus both yesterday's build and the 5-year average +7 BCF/day injection. Click for more on today's projected injection and Realtime natural gas inventories.

For the natural gas storage week of July 28-August 3, I am projecting a +53 BCF storage injection, which would be right at the 5-year average. I view this as a victory for the bulls in that it is as low as it is given production at record levels and much-below average temperatures across the Deep South, one of the primary sources of cooling demand during the summer, throughout the week. A +53 BCF injection would be the 3rd largest injection in the past 5 years, as shown in the Figure to the right, ahead only of +91 BCF and +80 BCF injections in 2013 and 2014, respectively. Should a +53 BCF injection verify, natural gas inventories would rise to 2361 BCF while the storage deficit versus the 5-year average would hold at -565 BCF. The year-over-year deficit, meanwhile would fall a steeper 25 BCF to -663 BCF. This remains a preliminary projection and will be revised further over the next 4-5 days as finalized temperature and pipeline data is integrated into my model. Click HERE for more on this week's projected storage injection. Looking ahead to next week, natural gas demand looks to rise above-average each day of the week as hotter-than-normal temperatures dominate the major cities of both the East and West Coasts. At this time, the weekly injection for August 4-10 could be as low as +35 BCF, 21 BCF bullish versus the 55-year average and enough the push the storage deficit to just under -600 BCF. Much more on next week's storage picture in Monday's Commentary, but in the meantime click HERE for more.